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1099 Form Instructions for Practitioners - Part 3 Fixing 1099 Form Errors, Penalties, Remedies, and Backup Withholding Your webinar will begin shortly.

Tanya Baber

Tax Edge

1099 Form Instructions for Practitioners Part 3 Fixing 1099 Form Errors, Penalties, Remedies, and Backup Withholding

Tanya Baber, EA, CTRS Tax Edge

Course Overview ● Errors and Compliance ○ Correcting errors ○ Form W-9 ○ Foreign payee considerations ○ Backup withholding ● Penalties and Remedies

Correcting 1099 Forms

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Correcting 1099s - Two Types of Errors

Error type one

Error type two

● Incorrect $ amount

● Incorrect or missing payee TIN or address

● Incorrect payee name or address

● Incorrect type of 1099 form

● Return should not have been filed

● Must prepare two (2) returns:

● Prepare new 1099, mark X in “corrected” box ● Prepare new transmittal (1096)

○ A. New 1099 marked “corrected” with same payee info as incorrect - with zero amounts ○ B. New 1099 correctly prepared with no X in “corrected” box ● Prepare new transmittal 1096 marked “to correct return”

Form W-9

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form W-9 ● Used to request TIN ● Used to request certification of exemption from withholding ● Used for reporting payments to payee ● Note: You are required to obtain TIN from payee ○ But not required to use W-9 ● If you use W-9 - you keep - do not send to IRS

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

ID Number Matching ● What is a TIN? ○ Can be a SSN ○ Can be an EIN ○ Resident aliens and nonresident aliens not eligible for SSN + Can obtain TIN for tax reporting + Number will start with a ‘9’

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form W-9 ● ID number matching ○ Highly recommended ○ Prevents reporting errors later ○ Matches ID, name ● W-9 form can be used to streamline ○ Type of organization ○ Proper name ○ Proper ID

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

ID Number Matching ● Disregarded entity / single-member LLC issue ○ W-9 line - put owner’s name ○ Check the LLC box ○ Use owner’s EIN if owner is not an individual + Select entity of the owner ○ If owner is an individual, enter SSN ○ If election to be taxed as a corporation (S or C) + Put name of LLC in the name line and use EIN

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

ID Number Matching ● IRS does match 1099 information to TIN ● If you do not have a TIN you are to do backup withholding ○ Rate is 28%

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

ID Number Matching ● IRS does match information ○ Taxpayer will receive notice from 1-3 years of filing ○ Mismatch of information ○ Could be misreported on return ○ Not matching correct TIN / name combination ○ W-9 can help eliminate many mismatch errors ● Payer can receive notices too

Poll Question

The “B” Notice

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

The Dreaded “B” Notice ● If TIN and name does not match, IRS will issue “B” Notice ○ More properly CP2100 Notice + IRS Pub. 1281 describes how to handle B Notices + B Notices usually show up in the fall ● B stands for “backup withholding” ● Occurs when the IRS notifies payer of non-matching TIN

Publication 1281: https://www.irs.gov/pub/irs-pdf/p1281.pdf

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

The Dreaded “B” Notice CP2100 Notice - 1st notice + Must request (in writing) correct info within 15 days + Cannot request information by telephone + If no response from payee + Backup withholding required if no response in 30 days (28%) + Can discontinue withholding if payee provides correct information + But… cannot return the withholding to the payee + Must report on 1099 and 1096 forms, as well as 945 for withholding

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

The Dreaded “B” Notice CP2100 Notice - 2nd notice ○ Sometimes called a “C” Notice + Must send payee letter requesting TIN within 15 days + If no response from payee + Backup withholding required if no response in 30 days + CANNOT discontinue withholding (even if payee provides correct information) + Cannot stop withholding until notified by the IRS to stop

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

The Dreaded “B” Notice ● If a payer fails to take action required by CP2100B Notice ○ Or subsequent C Notice ○ Can be held responsible for all backup withholding + Must pay it with penalties and interest + Even if they did not backup withhold

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

The Dreaded “B” Notice ● Best practices - documentation! ○ All actions taken in response to B Notices ○ Send out notices to payees promptly ○ Do any backup withholding if required ● Get a W-9 at the beginning ● Use TIN matching services ahead of time ○ If registered for e-Services with the IRS ○ Can access this product Publication 2108A describes this program https://www.irs.gov/pub/irs-pdf/p2108a.pdf

Poll Question

Form W-8 / W-8BEN and Foreign Payees

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form W-8 / W-8BEN ● Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding ● Request from any foreign person you are making payments to ○ Can be individual, corporation, gov’t, or non-profit ● Used to request exemption ○ From withholding ○ Or a reduced withholding rate ○ 30% backup withholding otherwise

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form W-8 / W-8BEN ● Report withholding on 1042-S ○ Not 1099 ● Use 1042-T for transmittal ○ Not 1096 ● TIN is not required unless a treaty benefit is claimed ● Applies when there is U.S. source income ○ Depends where services are performed (in the U.S. for example) ○ Rents / royalties - where the property is located / used

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form 1042-S

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form 1042-T

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Foreign Agricultural Workers ● Compensation of $600 or more ● Foreign agricultural workers ○ On H-2A Visas ● Generally reported on Form W-2 ● However, if H-2A visa worker did not provide TIN ○ Employee is subject to backup withholding instead ○ This situation requires reporting on 1099-MISC

Backup Withholding

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Backup Withholding 5 Situations where backup withholding is required

IRS notifies you of incorrect ID number

IRS notifies you for interest or dividends

No ID number provided

Payee fails to certify ID number for interest, dividend, or broker reporting

Payee fails to certify they are not subject to backup withholding

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Backup Withholding ● No $600 minimum ● 1099 must be filed ● 28% backup withholding rate ● Report and pay with Form 945 ● Trust fund (and liability) ○ Also liability to pay the withholding, even if not withheld from payee

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Form 945

Poll Question

Penalties

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - W-9 ● Applies more for the payee ● $50 penalty for failure to furnish TIN when W-9 is requested ● $500 civil penalty for false information ● Could also be criminal penalties ○ Including imprisonment

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - Failure to File / Furnish ● Penalties can be assessed for information reporting forms in two cases: ○ Failing to file + File documents with the IRS ○ Failing to furnish + Provide documents to the payee + By the proper due date

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - Failure to File / Furnish ● Failure to file correct return by due date with IRS ● Includes: ○ Not filing ○ Missing TIN or incorrect TIN ○ Incorrect information ○ Incomplete information ○ Paper file if required to e-file ○ Or paper filed with incorrect non-machine readable forms

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - Failure to File / Furnish Qualifying small business ● Average gross receipts ● Most recent 3 tax years are less than $5 million

Per return penalty ● One 1099, plus the corresponding 1096 is TWO returns

Increasing penalties ● Force compliance ● Adjusted maximum penalties to inflation now annually since 2016

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - Failure to File / Furnish $50 per return ● Within 30 days of due date

$100 per return ● After 30 days of due date but before August 1

● Max of $536,000 per year ● Max of $1,609,000 per year ● $187,500 max for qualifying small business

● $536,000 max for qualifying small business

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalties - Failure to File / Furnish $260 per return ● After August 1 (or incorrect ones) ● Max of $3,218,500 per year ● $1,072,500 max for qualifying small business

$530 per return ● If intentionally disregarded filing requirements ● Unlimited penalty (no maximum) ● Unlimited penalty (even for qualifying small business)

Poll Question

Penalty Relief

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalty Relief ● You may be able to request abatement of penalties for: ○ Reasonable cause + Mistakes / death / illness / ignorance, etc. + Statutory exemptions + Administrative waivers + Disaster area + Proof of bad legal / tax advice + Correction of an IRS error

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

Penalty Relief ● In addition to reasonable cause - there are other penalty exceptions: ○ Inconsequential error + Does not prevent IRS from processing return + Can still correlate information + However, if related to TIN, name, or money, amount is not inconsequential ○ De minimis + If filed timely but corrected by August 1 + Penalty won’t apply to >10 returns + Or .5% of total number of returns required for that year

1099 Form Instructions for Practitioners - Part 3 Tanya Baber, Tax Edge

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Tanya Baber [email protected] | 855-726-EDGE

INSTRUCTOR

Tanya Baber EA, CTRS Tax Edge Tanya has been an enrolled agent with the IRS since 2006 and received her bachelor’s degree in public accounting and business administration from Colorado Mesa University. Tanya practices as a public accountant from her hometown of Grand Junction, CO and also helps clients from the east coast to Hawaii and a few internationally. Since 1994, Tanya has guided clients in the areas of accounting and payroll, personal, business, and non-profit tax preparation, planning, consulting and representation, as well as solving their complex tax problems.